This question came up again last week on a transfer pricing project (many thanks to AH and NA for raising it!). The issue was how the relationship between ‘parent’ company and its own branch / permanent establishment (PE) should be documented – and specifically the use of a memorandum vs a document in the style of an agreement.
The first and most obvious point to make is that it’s not possible for a legally binding intercompany agreement (ICA) to exist with just one party, and therefore risks cannot be allocated contractually. Nevertheless it is usually useful to document the intended relationship between the ‘parent’ and its PE, and the intended allocation of risks. A group's transfer pricing policies would not typically include the level of detail required for this.
From a legal perspective, the style or format of the document makes no difference, and the OECD’s Transfer Pricing Guidelines do not appear to express any views or recommendations one way or another. Whether tax authorities review an ICA / memo before or after the functional analysis should also make no difference to the legal approach – in our view, the overriding task is simply to ensure that the documentation as a whole presents a consistent picture.
Our preference is usually to use a document in the form of a typical ICA. The main reason for this is so that other similar transactions within the relevant group can be shown to be on equivalent terms (as far as possible). Provided that the ‘agreement’ makes it clear on its face that it is not in fact legally binding, there should be no possibility of it being regarded as misleading in any way. A number of the large corporates we work with also adopt this approach.
To date, we have not received any feedback that particular tax administrations regard one approach as more appropriate than another - but if you have, we would of course be very keen to hear about it.
N.B. On 23 November at 1pm UK time, we'll be hosting a free webinar on how to manage the legal and practical aspects of cross-border corporate simplification projects - including some of the key lessons learned from numerous legal entity projects with multinational groups. You will be very welcome to join us, and to ask any questions you may have. You can reserve a place here.